The president of the retailer Prime Products has just approached the company’s bank with a request for a $30,000, 90-day loan. The purpose of the loan is to assist the company in acquiring inventories. Because the company has had some difficulty in paying off its loans in the past, the loan officer has asked for a cash budget to help determine whether the loan should be made. The following data are available for the months April through June, during which the loan will be used: On April 1, the start of the loan period, the cash balance will be $24,000. Accounts receivable on April 1 will total $140,000, of which $120,000 will be collected during April and $16,000 will be collected during May. The remainder will be uncollectible. Past experience shows that 30% of a month’s sales are collected in the month of sale, 60% in the month following sale, and 8% in the second month following sale. The other 2% is bad debts that are never collected. Budgeted sales and expenses for the three-month period follow: April May June Sales (all on account) $ 300,000 $ 400,000 $ 250,000 Merchandise purchases $ 210,000 $ 160,000 $ 130,000 Payroll $ 20,000 $ 20,000 $ 18,000 Lease payments $ 22,000 $ 22,000 $ 22,000 Advertising $ 60,000 $ 60,000 $ 50,000 Equipment purchases − − $ 65,000 Depreciation $ 15,000 $ 15,000 $ 15,000 Merchandise purchases are paid in full during the month following purchase. Accounts payable for merchandise purchases during March, which will be paid in April, total $140,000. In preparing the cash budget, assume that the $30,000 loan will be made in April and repaid in June. Interest on the loan will total $1,200. Required: 1. Calculate the expected cash collections for April, May, and June, and for the three months in total. 2. Prepare a cash budget, by month and in total, for the three-month period
The president of the retailer Prime Products has just approached the company’s bank with a request for a $30,000, 90-day loan. The purpose of the loan is to assist the company in acquiring inventories. Because the company has had some difficulty in paying off its loans in the past, the loan officer has asked for a
| April | May | June | ||||
| Sales (all on account) | $ | 300,000 | $ | 400,000 | $ | 250,000 |
| Merchandise purchases | $ | 210,000 | $ | 160,000 | $ | 130,000 |
| Payroll | $ | 20,000 | $ | 20,000 | $ | 18,000 |
| Lease payments | $ | 22,000 | $ | 22,000 | $ | 22,000 |
| Advertising | $ | 60,000 | $ | 60,000 | $ | 50,000 |
| Equipment purchases | − | − | $ | 65,000 | ||
| $ | 15,000 | $ | 15,000 | $ | 15,000 | |
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Merchandise purchases are paid in full during the month following purchase. Accounts payable for merchandise purchases during March, which will be paid in April, total $140,000.
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In preparing the cash budget, assume that the $30,000 loan will be made in April and repaid in June. Interest on the loan will total $1,200.
Required:
1. Calculate the expected cash collections for April, May, and June, and for the three months in total.
2. Prepare a cash budget, by month and in total, for the three-month period.
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The president of the retailer Prime Products has just approached the company’s bank with a request for a $30,000, 90-day loan. The purpose of the loan is to assist the company in acquiring inventories. Because the company has had some difficulty in paying off its loans in the past, the loan officer has asked for a
- On April 1, the start of the loan period, the cash balance will be $24,000.
Accounts receivable on April 1 will total $140,000, of which $120,000 will be collected during April and $16,000 will be collected during May. The remainder will be uncollectible. - Past experience shows that30% of a month’s sales are collected in the month of sale, 60% in the month followingsale, and 8% in the second month following sale. The other 2% represents
bad debts that are never collected. Budgeted sales and expenses for the three-month period follow:
|
|
April |
May |
June |
|
Sales (all on account) |
$300,000 |
$400,000 |
$250,000 |
|
Merchandise purchases |
$210,000 |
$160,000 |
$130,000 |
|
Payroll |
$20,000 |
$20,000 |
$18,000 |
|
Lease payments |
$22,000 |
$22,000 |
$22,000 |
|
Advertising |
$60,000 |
$60,000 |
$50,000 |
|
Equipment purchases |
- |
- |
$55,000 |
|
|
$15,000 |
$15,000 |
$15,000 |
- Merchandise purchases are paid in full during the month following purchase. Accounts payable for merchandise purchases during March, which will be paid during April, total $140,000.
- The company needs a minimum cash balance of $20,000 to start each month, the interest rate of loan is 12%. To maintain the cash balance, the company will borrows on the first day of the month and when the company have enough cash to repays loans and interest, it will pay on the last day of the month.
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